Buying a larger home: "just enough" or "all the way"

[Lusitan]

My wife and I have lived in our current home for about 5 years. We always knew that this home would not be a long-term home for us, because of its small size. Now that we have a child, we’re starting to feel like we’re running out of room, and since we’re hoping for another child before long (and maybe one after that …) we’re making plans to buy a larger home.

I know the housing market is sinking. I think house prices will still come down another 10 – 15% in my area (NYC metro) whether through actual price reductions or by prices staying flat over the next few years while inflation eats away at the real cost. But at some point in the next year, we want to buy a new home regardless of where the market is at; there are solid reasons we need to move, and I’m not big on trying to time the market anyway.

We’ll also be moving to a new town, not far from where we are, but a town that’s we think is a better fit for us. So there is the variable of us moving to a new town and possibly not really knowing the town all that well yet. But we think it’s a good fit based on the research we’ve done.

There are two ways we could go with a new home:

(1) buy “just enough” home to suit us now (e.g. with 1 or maybe 2 small kids) and expect that we would likely move again within 7 years or so, or

(2) buy a house that will fit all of our projected future needs now, even though it’s more than we currently need.

I’m torn between the two options. Using the old rule of thumb, we could probably find an “enough for now” house under 2x our annual gross income; a bigger house would still be about between 2x – 3x our annual
gross income, probably about 2.6x.

We found one home that we really like – it falls into the “bigger house” category. It has everything we’re looking for: enough size, a good yard, walking distance to public transportation and a little downtown area, good natural light, and it’s an older home so it has some aesthetics that appeal to us. In fact, it’s sort of unique in that we’re trying to stay close to downtown, so that we can walk more and drive less, but this house is larger than most houses/lots nearby (not necessarily a good thing for the house value, I know) so it still has a nice yard, which we really like.

We haven’t yet found a “just enough” house that we really like, although we’ve only been looking for about a month or so.

My heart is telling me to go ahead and buy the bigger house; it just feels right, and my wife and I can both picture us living there. My LBYM head is telling me to look for a smaller house. (On the other hand, my financial head is also leery of buying a house in this market knowing that in 5 or 6 years I will probably want to sell it to buy a bigger house.)

Here’s how the numbers would look with the two options:
Big House
Purchase price = 2.65x annual income
Monthly payment = 38% of NET monthly income; 24% of GROSS monthly income

Smaller House (when we find one)
Purchase price = 2x annual income
Monthly payment = 30% of NET monthly income; 20% of gross monthly income

Right now we save a significant portion of our income, and while we’d still be able to fully fund our retirement accounts, we’d definitely have to cut back on our savings rate if we went for the bigger house, at least for the first few years.

Buying any house will slow my plans toward FIRE, but it's a not unexpected event. I guess the question just comes down to how much it will affect my FIRE plans.

When you bought your house, how much of your then-income was it? What percentage of your monthly gross income were your mortgage payments? How much did the emotional "feels right" factor influence your decision?

[Midpack]

I've always been house poor, far below even your lesser option. I've always listened to my LBYM head, and achieved FI in my 40's. My present house was 16% of my gross when I bought it, about 5% by the time I paid it off (early). Whatever's important to you, doesn't matter what anyone else might choose. Best of luck whatever you decide...

[Nords]

Quote:

Originally Posted by Lusitan Now that we have a child, we’re starting to feel like we’re running out of room, and since we’re hoping for another child before long (and maybe one after that …) we’re making plans to buy a larger home. We found one home that we really like – it falls into the “bigger house” category. It has everything we’re looking for: enough size, a good yard, walking distance to public transportation and a little downtown area, good natural light, and it’s an older home so it has some aesthetics that appeal to us. In fact, it’s sort of unique in that we’re trying to stay close to downtown, so that we can walk more and drive less, but this house is larger than most houses/lots nearby (not necessarily a good thing for the house value, I know) so it still has a nice yard, which we really like.

You haven't mentioned whether schools are important to your choice, or if you don't care because you'll be homeschooling.

Distance to the school is also important, especially when your kid(s) start picking up the after-school & weekend activities. We've saved days out of our lives by only living 1.5 miles away (within bicycle range).

Quote:

Originally Posted by Lusitan When you bought your house, how much of your then-income was it? What percentage of your monthly gross income were your mortgage payments? How much did the emotional "feels right" factor influence your decision?

Our first three homes were as much as we could afford (which wasn't much) and get a mortgage for. Our mortgage payments were right up to the bank's 36% funding limits (we had no other debt).

Financially, Elizabeth Warren ("The Two-Income Trap") recommends not getting any more mortgage than you can afford on one income. The trap snaps shut when you acquire a huge mortgage payment and then lose one of the dual incomes. The advantage of this conservative approach is that you can accelerate your FIRE savings or use the extra income to pay down the mortgage.

Emotionally, I suspect that you'd be kicking yourself (and your spouse would help) if you didn't buy the bigger house. It's not as if you're buying an over-the-top McMansion, and it sounds like you plan to grow into it. The advantage of your diffidence is that you can probably lowball the offer a little and keep looking.

[Texas Proud]

Quote:

Originally Posted by Midpack I've always been house poor, far below even your lesser option. I've always listened to my LBYM head, and achieved FI in my 40's. My present house was 16% of my gross when I bought it, about 5% by the time I paid it off (early). Whatever's important to you, doesn't matter what anyone else might choose. Best of luck whatever you decide...

I think you got the phrase backwards...

House poor means you bought a lot more house than you can afford... so because of your house, you are 'poor' in everything else as all your money has to go to the house payments...

[Texas Proud]

My thinking is there is not enough difference in the price to worry about...

Buy the 'bigger' one now... while prices are down... at some point they will go back up and it might not be as affordable in 7 or so years...

[jazz4cash]

Since you say you would be looking to move up in 7 yrs if you got the 'just enough for now' home, you should get the bigger home. If you paying typical realtor fees, they could eat up 1-2 yrs appreciation. With a bigger home, I would be concerned with having efficient HVAC systems, age of roof and fixtures, etc to keep ownership costs reasonable. With a growing family I would prefer being in a more stable situation if possible

[SecondCor521]

Bought my current home in December 2006 with a 30 year fixed at 5.75%:

Purchase price / Annual salary = 2.78
P&I mtg payment / Monthly salary = 15.6%

I refinanced about a month ago to a 15 year fixed @ 4.625%:

P+I mtg payment / Monthly salary = 23.1%

I didn't choose this house based on emotion, I based it on its attributes compared to what I was looking for. So I didn't fall in love with it (in fact I still am not in love with my house, but I do like it OK). However, part of my evaluation process was which house I liked best on a "feel" level of the several that met the criteria I set out beforehand. It was using my intuitive thinking side instead of my analytical thinking side. This one was the one I liked best, so I bought it.

2Cor521

[Lusitan]

Thanks for the responses so far. I know you guys (and gals) on this forum share many of the same values I have, so although you're right Midpack, that it really doesn't matter what anyone else would do, I do value your insights and opinions.

Midpack - my current situation is like yours. My current house cost less than 1x our annual income when we bought it, and even less now. I think I pay maybe 6% montly gross income toward my current mortgage+taxes. So that's why these numbers I'm proposing, while they don't sound that bad, are a big change for me.

Nords - the schools are OK in this town, not great like some surrounding towns, but frankly that's the only reason we could afford a house this size. The schools are no worse (and in truth probably better) than the public schools I went to growing up. While I doubt we will homeschool, my belief is that how well your kid does in school is about 90% due to what the parents enforce and teach at home, so I'm OK with my kids going to a so-so school.

There is also a decent likelihood that the schools in the town will improve, as the town itself has been on the upswing in recent years. So that by the time my 1 year old is in the middle of his schooling years, it might be substantially better. Biggest downside of the schools being only OK is resale value ... but since we plan to stick around for a long time, that wouldn't be an immediate concern. And going out far into the future is hard to predict how things would be down the line with the schools.

Distance-wise, that's one of the nice things about this town. I'd be within a 10 minute walk to the train, the elementary school is about a 10 minute walk, the middle school and high school are about 15 minutes away by foot. So the commute works for everyone.

On the two-income trap, we are a single-income family, so essentially all the numbers I'm quoting are from my income. My wife will be home as long as we have young children who aren't in school yet. There is the possibility of her doing some freelance work from home, or part time, but that's not income I factor into my calculations.

Being a single-income family, I'm aware of the fact that we could in theory easily lose 100% of our income with a job loss (as opposed to 50% with two-income losing a single job). That makes me a little more cautious about how much I want to spend on a house. However, I'm in a pretty good niche field (intellectual property law) and it's hard to imagine being out of work for any length of time. So long as I'm properly insured, I'm pretty sure we'll be OK income-wise.

You're right about the emotional kicks I'll be giving myself if it turns out this was a unique opportunity that I walked away from. Luckily, my wife is pretty cool and I have already convinced her that this might be too much house for us, although she'd love to buy it. She's very low-maintenance and trusts my opinion, so mostly I'd be kicking myself while she laughed about it :-) The downside of that though, is that pretty much the decision is on me ...

One lowball offer (15% less than asking) was already turned down; I think I could probably offer 10% less than asking price (which has been reduced from the original asking price). Not exactly a lowball, but within reason I think.

Anyway, thanks for listening and giving your input. I'm going to be doing a lot of thinking about it this weekend.

[Lusitan]

Some responses posted while I was typing ...

jazz4cash - although it is an older home (one of the things we like about it) it has a new HVAC system (new heater, hot water heater, and central air already installed), the roof was replaced a few years ago (ripped off and replaced) and the windows were replaced about 5 years ago. The house seems sound from that perspective - what it needs most right now is an outside paint job, but otherwise it seems to be in good shape (pending inspection by a professional, of course).

secondcor521 - just curious, are you married and/or have kids? I feel like it'd be easier to make up my mind if I knew it would be just me living there, but I'm trying to make this decision that affects others, and so the "emotion" factor keeps slipping in there.

Also - how long did you seriously look for a house (i.e. follow the listing almost daily, go visit houses on weekends, etc.) before you found the right house? We found this within a month, so maybe I'm rushing. But ... sometimes you find the right one right away I guess.

[RunningBum]

How likely is it that you'd really be in the same town in 7 years? If you really think you will be, buying the bigger house might be ok, because you'll save yourself another real estate commission down the line when you want to upgrade. Besides, interest rates and the housing market favor the buyer right now, and might not in a few years.

But if you're not too sure about it, you might have stretched to buy a house you don't really need, and need to sell it just when you'd start to be using it more. A smaller house would probably be easier to sell too.

[Lusitan]

Good point, RunningBum. It's very likely we will be in this town 7 years down the line, because it's within commuting distance to NYC (where I work) and there are always many jobs in my field here. There's always the possibility that we will move though, even if unlikely and you're right the bigger the house, I suppose the harder it will be to sell down the road. And this place is not a rental type place. That's one benefit of a smaller house, it'd probably be easier to rent.

I hadn't thought about the realtor commission that much, honestly I had just been thinking about the hassle and emotional energy that goes into moving. But that's something to consider ...

[W2R]

Quote:

Originally Posted by Lusitan When you bought your house, how much of your then-income was it? What percentage of your monthly gross income were your mortgage payments? How much did the emotional "feels right" factor influence your decision?

• 2.57 times my then-income
• payments were 19% of gross monthly income; P&I part only was 15% of gross monthly income. 20% down.
• Emotional "feels right" factor was absolutely necessary, but secondary to the house being sound, with good resale and at a fair price.

What concerns me in your post is that you assume that you now know what you will need in 5-7 years. I don't think any of us know that. Imagine how you would feel in five years if you were unable to have more children and stuck in a huge house, or if (heaven forbid) your wife died, or (at the opposite extreme) if she had two sets of quintuplets and your mother-in-law moved in. There are just two many factors to predict.

So, I would vote for the house that is just a little bigger than comfortable now; perhaps big enough for one more kid. For example, if you are comfortable in 1500 square feet now, I'd suggest around 1750 square feet.

There exists more than one perfect house for everyone. Falling in love with a home puts you in a terrible negotiating position.

[Lusitan]

Quote:

Originally Posted by Want2retire There exists more than one perfect house for everyone. Falling in love with a home puts you in a terrible negotiating position.

Great advice. I actually didn't fall in love with the home yet. When I first saw it, my reaction was "Yeah, it's nice ... but it's expensive." (I have a pretty good cheap b@stard frugal reflex.)

My wife was the one who was loved the house. Since looking at other houses, that particular house has grown on me. And I've been thinking about the benefits of the house for my family down the road.

I understand your point about not planning too far ahead. But I also grew up in the same house where my parents still live, and I guess that's something I appreciate and always thought about trying to do myself with my own family.

I'd be fine with quintuplets (just get a lot of bunkbeds!) or even with mother-in-law moving in (I'm lucky, we get along great and she's an amazing Old World cook!) ... but I recognize the wisdom in your point.

What part of New Orleans are you in? I went to school there, but haven't been back since Katrina.

[GoodSense]

I would go for the bigger house. When you buy/sell, the realtor's commission and loan origination/closing fees could easily add up to 10% of your house' value. Realistically it will take you quite a few years in today's market to get that 10% back. Plus, even at 2.6 times your income, it's still pretty affordable by conventional standards.

The danger is to keep your possessions under control. I was a realtor for a few years. What I found is that people have a tendency to fill up whatever space they had. You certainly don't want to fill up your house in the next couple of years, while your need continues to grow. Mentally reserve some space for your unborn children and don't buy more furniture than you need now, even though you have the space. Otherwise you'll feel cramped when you actually need the space.

Here's our history when it comes to housing:
1st house: x3.2 annual income (single income)
2nd house: x2 annual income (double income)

Good luck with whatever you decide.

[SecondCor521]

Quote:

Originally Posted by Lusitan secondcor521 - just curious, are you married and/or have kids? I feel like it'd be easier to make up my mind if I knew it would be just me living there, but I'm trying to make this decision that affects others, and so the "emotion" factor keeps slipping in there. Also - how long did you seriously look for a house (i.e. follow the listing almost daily, go visit houses on weekends, etc.) before you found the right house? We found this within a month, so maybe I'm rushing. But ... sometimes you find the right one right away I guess.

Lusitan,

My wife divorced me about a year and a half ago. We share custody of our three kids 13/8/6. The house I live in is far too big for just me but about right for me and the kids.

I looked in a low key way for about five months; I first saw the house I now live in about a month into searching. But my situation was such that I was wanting to buy a house but also wanting to wait until my divorce was finalized so I knew what my child support would be and therefore what I could afford in terms of a house. Fortunately for me, the house remained on the market that entire time. I kept looking but didn't find anything better, so I bought that one.

Your use of the phrase "right one"/"right house" makes me think you haven't taken Want2Retire's words to heart. That will only end up in you overpaying and overstressing about your new house IMHO. Again, I like my house, and it was the best choice for me, but there were other houses out there that would have worked. And because I wanted to remain in the same school district, I essentially limited myself to houses in a one mile square area -- you've got a lot more choices than I allowed myself. To say it another way, it's not 1 right house and 20 wrong houses, it's the best house, the second best house, the third best house, etc.

2Cor521

[chinaco]

IMO - Buy just enough house to fit your needs and invest the rest of the money in a diversified portfolio of stocks and bonds (index funds is my preference).

Buying a large house will drive up additional expenses. Those additional expenses could be invested for FIRE.

Think about the difference between a 2000 Sqft home and a 3000 sq ft home.

Several extra rooms to furnish, heat, cool, decorate, higher property taxes, more insurance, more house to keep clean, on and on.

I think this is a major problem with many of us today. A house is kinda like a SUV for many... a bit of a status symbol.

DW and I bought more house than we need. Thanks goodness we scaled it down from what we were about to build during the tech bubble.

We intend to downsize in the next few years.

We will buy something that is about 1/2 to 2/3 the square footage that we have today.

[dumpster56]

Come on .. Head out to warren or sussex county in NJ!! yes you will be able to buy a real nice BIG house out there. Commute to NYC sure no problem RT 78 or Rt 80!!!

Good luck!

How does this baby look??Single Family Home - Greenwich Twp, NJ, 08886 - Realtor.com

[Midpack]

Quote:

Originally Posted by Texas Proud I think you got the phrase backwards... House poor means you bought a lot more house than you can afford... so because of your house, you are 'poor' in everything else as all your money has to go to the house payments...

I'll be damned, you're right. Guess we've been 'house rich' all along...

Lusitan. Reading your thoughts and they all seem very sound to me. Nothing wrong with the feedback you're getting here, but you're more than capable of deciding without it. Just keep looking and mulling it over until you're convinced it's right. When you finally sit down to sign something, I have no doubt you will have done what's right for you and your family.

As someone else has pointed out. The big house will not only mean a bigger mortgage payment, but utility costs will be higher, property taxes probably higher, repair/maintenance costs will be higher and keeping up with the Joneses will be higher. It all adds up surprisingly, and you're going to pay, not the rest of us experts.

Check out The Not So Big House books by Sarah Susanka, or watch Small Space, Big Style on HGTV. With a little ingenuity, we can live very comfortably in much smaller spaces than we think.

If you have to have that bigger house, consider staying where you're at for a few more years (even a year would help), build up your net worth, and then buy that larger house (if that's what you really want) at a discount. You said yourself that you think prices are still falling (and that seems to be the consensus view) - why would you knowingly buy into that market? At that point you can front a bigger down payment and reduce your monthly obligation, or not. Good luck, big decision, but one we all grapple with...

[donheff]

I didn't see an answer to Nord's question about schools. As long as school is well covered I would say go with the nice place. It will make a huge difference in how you live your life to be in a place you love rather than a place you can tolerate. At times there is too much of a "no pain, no gain" attitude here. You can have your cake and eat it too - just be reasonable about it. LBYM doesn't have to mean live deprived. We do have life before ER to consider.

Edit: a key factor here is that you sound like you are going for a place you can stay in. If you follow a typical career trajectory your will increase you earning over time which will enable you to raise your savings, provided you don't feel like you need to keep moving up to the bigger, better place.

[growing_older]

I've always thought a house is not exactly an investment, since the main purpose is to live in it. Many argue that primary residence should be excluded from net worth for certain calculation. In my experience the "living in it" part is the most important. You need to have a mortgage you can live with and it will affect ability to save and FIRE (positively or negatively, depending on what you do) but the experience of living in the house is most important.

For me, once I had kids and they had friends and activities, the ties to a community become stronger. I was more apt to move before that and more apt to stay put after, so if you are thinking of more kids you might want to consider the larger house instead of a smaller one that will require another move.

If you really like the house (or maybe if it is your wife who really likes it) there's a lot to be said for buying the place you love even if the economics are not the best they could be. A house is a big financial decision but it's also a very big life decision and you should get what makes your life work best for you (and your family of course). If you don't like either of these houses that much, then maybe you should keep looking. I don't think you can be sure about timing a real estate transaction, but it looks like the real estate market will be kind to buyers for some time, so you can afford to look and look until something you do love becomes available.